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The battle to re-top Apple's market cap

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Comment Last week, we had two so-crazy-they-can't-be-true events that sent the internet into a tizzy. And both involved Apple and Microsoft.

First, word arrived that Microsoft chief executive Steve Ballmer would appear on stage with the God-like Steve Jobs at Apple's forthcoming World Wide Developer Conference in San Francisco, California. "OMG, this is too good to be true!" the world yelped. And, well, it was too good to be true, as Microsoft Tweeted later that day.

Second, Apple's market cap edged past Microsoft's, making it the single most valuable tech company and the second most valuable publicly-traded business after oil giant Exxon Mobile.

"OMG! Apple? With just 34,000 employees and its single-figure market share on the desktop?

"Doesn't Microsoft have an army of 100,000? Isn't it the maker of the world's most widely used PC operating system? Isn't Windows on 90 plus per cent of PCs? And, wait, didn't Microsoft give Apple a $150m cash injection in 1997 to help pull the then-ailing company - on hiatus from Steve Jobs and prior to the iMac/iBook - off the ropes?"

Oh, the irony! Bloggers and news sites nearly went rabid over this turnaround.

But let's put a damper on the hype. Attention fabois everywhere: Microsoft isn't so desperate that it needs to appear at an Apple developer conference. Is it less valuable than Apple? Maybe. But the answer isn't as straightforward as we've been led to believe.

Last year, in terms of revenue and profit, Microsoft was worth more than Apple. A trio of Microsoft's product divisions pulled in more dollars than Apple's entire business. Microsoft's Client division (home to Windows), the Server and Tools division (SQL Server and Exchange), and the Business division (Office) had combined sales of $46bn in the company's fiscal year ending June 2009, while Apple pulled in $36bn in sales across all operations for its 12 months ending August 2009.

Net income - that's profit - for Microsoft's three units was $28.2bn, versus $5.7bn for the whole of Apple. And at the end of 2009, Microsoft was sitting on $6bn in cash, versus Apple's $5.2bn.

This year, it’s looking like Apple will blow away Microsoft’s core businesses. Windows Client, Server and Tools, and the Business Division are shrinking, flat, or in single-digit growth for the first nine months of the company’s current fiscal year. Combined, the units have earned $20.6bn, compared with $22.3bn in the first nine months of last year.

And halfway into its year - boosted by the iPhone — Apple has reported that sales are nine billion dollars ahead of where they were this time last year. That's $29.1bn in revenues, and Apple's cash pile is now at $10bn, compared to Microsoft's $8.1bn.

But Apple may be susceptible to more fickle consumer buying habits, while Microsoft has the comfort of being embedded on business servers and PCs. That makes Windows, Office, SQL Server, and Exchange potentially more reliable earners. Office is certainly stable, pulling in a steady $14bn each year.

But this stability is also a problem. Stable businesses are like empires, impressively big in the present but doomed to fade. Microsoft’s big earners might be pulling in the billions today, but where’s the future growth? Interestingly, Windows Client sales and revenue are down 15 per cent and 18 per cent respectively for the first nine months of this year — despite the debut of Windows 7.

One reason for this might be Microsoft chief operating officer Kevin Turner’s decision to aggressively discount the new operating system to displace the company’s own Windows XP and beat the Mac and its seven-per-cent market share. If that’s the case, then Microsoft will hope the COO’s gamble of short-term loss for long-term market share pays off.

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